The audit profession needs a new and different regulatory framework, new legislation and a new and effective Independent Regulatory Board, with total legal and financial liability for damages the profession may cause to investors or nations.
The US Securities and Exchange Commission (SEC) has charged KPMG SA and Deloitte & Touche and BDO for their involvement in audit work that circumvented the full oversight of the Public Company Accounting Oversight Board. Consequently, BDO Canada paid a US$50,000 penalty, KPMG in South Africa $100,000, while Deloitte in Zimbabwe agreed to pay disgorgement and interest totalling $99,057, and KPMG in Zimbabwe agreed to pay disgorgement and interest totalling $141,305.
Almost two years ago, on 1 April 2016, KPMG publicly withdrew its professional services from the Gupta group of companies. We now know a great deal more than then, and yet the full extent of KPMG’s violation of codes of good corporate governance, and duty of care as auditors, as well as their total disregard for risk identification and mitigation, are yet to be divulged. Based on publicly available information, including KPMG’s own public admissions, things went horribly wrong within the firm. The company had to dismiss its top 10 executives in an unprecedented expression of total failure of its organisational management. As a gesture of “culture change”, KPMG appointed a new CEO and Exco members.
Over six months later, and with new executives in charge, KPMG still displays no change of culture; that is they have delayed IRBA’s investigations and snubbed the Ntsebeza Commission of Inquiry instituted by SAICA. Clearly, KPMG and other audit companies seem to respond differently to the regulatory bodies in the US and UK as compared to South Africa.
Whereas audit failures are by no means unique to KPMG, the latter’s misconduct extends beyond matters of assurance and audit missteps in the Gupta group of companies. Their central role in the so-called “SARS Report” places their failures in a category of its own, escalating their harm to matters of national welfare of the order magnitude that may well be unprecedented in modern times. I suspect that herein lies the real reason why the global firm is ducking and diving, not co-operating with regulatory authorities and compounding its own and the audit profession’s difficulties.
Be that as it may, neither the firm nor any of its partners has been brought to book two years later. And all the announcements and commitments by KPMG International have been hollow and at times arrogant promises – in effect a bundle of failed PR spins. Notably, KPMG’s top 10 executives were retired with a golden handshake, but this is no way to account for the individual or corporate misdeeds. In many ways, this was more of a reward than punishment. In this act too there was an oxymoron of laying off the firms’ top 10 executives and at the same time admitting to no guilt and frustrating IRBA by not submitting the relevant evidence to enable IRBA to conclude the matter. This is according to the CEO of IRBA in his parliamentary briefings, who attributed all the delays to lack of co-operation by KPMG.
To be specific: there must be a compelling and well-documented sequence of errors and failures for KPMG to lay off its top 10 executives summarily. Yet, the firm keeps refusing to submit the evidence to IRBA, or to explain to South Africa why each of these executives was laid off, and, as important, provide assurance that there is no other guilty party still employed in the firm.
These are by no means internal company matters alone. The SA taxpayers lost billions in the process, and KPMG’s conduct made a contribution to the country’s global credit rating downgrade too. I, for one, asked these very unanswered questions from the new CEO of KPMG, Ms Nhlamu Dlomu, during a one-on-one meeting with her at our offices on 28 September 2017, soon after her appointment to the job. Others have done likewise. Yet KPMG has ignored all these relevant issues, showing crass arrogance. Meanwhile, South Africa deserves an answer and needs a commensurate financial reparation.
Significantly, given that no credible forensic report was produced, and if produced never made public, it is only reasonable to assume that KPMG International did not feel accountable for the firm’s misdeeds in South Africa. In fact, at some point in the process, KPMG International announced a commitment to institute an internal inquiry chaired by an independent credible chairperson. This undertaking was subsequently simply ignored. That this never happened speaks volumes about the firm’s insecurity about the organisational facts that it was not prepared to open its records to the public scrutiny. There can be only one reason a firm would do that – at least in my view. And that is when the evidence is much worse than what we think and we speculate about. Otherwise, why would a global audit firm not care about its promises, its brand and not share the facts? After all, their core business is all about assurance.
As the above-mentioned case illustrates, KPMG’s failures are not confined to South Africa. A simple Google search would show a long list of misconduct and failures. The difference, however, is the speed with which the regulatory agencies deal with such cases of audit failures in jurisdictions such as Germany, the UK and the US. This, in turn, highlights the inefficacy and the incompetence of IRBA in South Africa. Furthermore, the governing legislation within which IRBA operates is out of sync with the prevailing financial and corporate milieu and the dominant ethics within the major audit firms.
Whereas the audit firms regard themselves as the intellectual hub of good governance advisory services, none of these firms has a credible and compliant board of directors. To comply with good practices of corporate governance, these firms’ boards should have majority non-executive directors, appropriately balanced in terms of the mix of competencies and so on.
Thus, at present their corporate structures are flawed, and as such they are wide open to abusive practices such as have been documented in KPMG vis-à-vis the Gupta businesses or “the SARS Report”, and so on.
To be more specific, these firms do not have sufficient independent non-executive directors, they have no independent audit subcommittees of the board, they have no balance sheet despite undertaking multimillion-rand service contracts, and so on. In my discussions with senior auditors of the major audit firms, they argue that their business model is based on “partnership”, hence they need not comply with the codes of good corporate governance.
This is such a nonsensical and hypocritical defence and indicative of the deep misunderstanding of the vital role of the audit firms in the modern financialised economy by the very players who are to provide assurance within such an economy. In effect, the audit firms appear to regard themselves as above the rules and codes of good corporate governance. This is indeed ironic, harmful to the economy and must be brought to an end. Organisational restructuring and radical reform of the audit firms and their business practices are a matter of national interest and of an emergency nature.
As important is that it is a fact that the audit firms, at least the major ones, do not provide just assurance services. A wide range of technical services such as tax advisory, corporate finance, project finance, research services, and so on are provided by these firms. By so doing, these firms have a serious built-in conflict of interest in their business models. Their cut-throat push for securing more business revenue via cross-selling is the order of the day, and their only defence is their so-called “Chinese wall” practices. This is simply inadequate, ineffective and inappropriate for the modern day financialised economy. The sooner they separate these various conflicting businesses, the better for the national welfare.
Companies should choose whether they provide assurance-audit services or other financial services. No direct or indirect shareholding structures between audit-assurance companies and other associated financial professional service providers should be allowed. To this end, it is encouraging to note that the UK’s financial regulating body is investing the case for the break-up of the “big four audit firms”, considering the case for “audit only firms”.
In brief, the audit profession needs an urgent “new dawn”, with a totally different regulatory framework, new legislation, new and effective IRBA as part of which these cozy “partnership entities” are restructured to be propriety, limited entities with credible corporate governance structures, appropriate balance sheets, and – important – with total legal and financial liability for the damages that they may cause to investors and/or nations. DM
Iraj Abedian is Chief Executive: Pan-African Investment and Research Services, Johannesburg
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Iraj Abedian, CE: Iraj holds a PhD in economics from Simon Fraser University, Canada. He was professor of economics at University of Cape Town (UCT) before joining Standard Bank as Group Chief Economist in 2000. He was extensively involved in economic and financial policy as well as institutional restructuring of South Africas public policy after 1994. In 2005, he founded Pan-African Capital Holdings (Pty) Ltd. In addition to growing the companys investment portfolio, Iraj was centrally involved in the conceptualisation and capital raising for a KZN Infrastructure Growth Fund (R1,5 billion), and the establishment of South Africas first environmental clean tech Fund (US$ 94 million fund), as well as the design and establishment of a housing finance fund called Housing Investment Partners (HiP). Within the Pan-African Capital group, he has helped establish two private equity funds, totalling R650 million. Iraj currently serves as a non-executive director on the board of Munich Re of Africa and Capital Fund Properties Ltd. He maintains an active interest in public policy discourse (macroeconomic policy, mining policy and infrastructure finance) and is an extraordinary professor of economics at Graduate School of Business Sciences (GIBS) of University of Pretoria. Over the past five years, he has also served as a member of the National Spiritual Assembly of the Bahais of South Africa- a not-for-profit religious body with focus on the promotion of spirituality within the society at large.
Adolf Hitler was the first European leader to ban human zoos.